What is the Income Approach to valuation?
The Income Approach operates on the theory that an investor will invest in businesses with similar investment characteristics, though not necessarily of the same business type. The income approach considers the earnings capacity of a company. It values a business based on the present worth of its future benefit stream, adjusted for risk. Because estimating the future financial performance of a business is speculative, historical data is taken into consideration (though not entirely relied upon) under the premise that history often repeats itself. There are two common methods within this approach: a) the Single Period Capitalization Method; and 2) the Multi-Period Discount Method (sometimes called the discounted future cash flows method). Another income method called the Multiple of Discretionary Earnings (DE) method is often used in valuing small owner-operated businesses where potential buyers are concerned with receiving a fair “return on time invested” in addition to a return on inv
The Income Approach considers the earnings capacity of a company. It operates on the theory that investors invest in businesses with similar investment characteristics, though not necessarily of the same business type. It values a business based on the present worth of the expected future benefit stream, adjusted for risk. Because estimating the future financial performance of a business is speculative, historical data is considered (though not entirely relied upon), on the premise that history often repeats itself. The two common methods within this approach are: a) Single Period Capitalization Method; and 2) Multi-Period Discount Method (sometimes called the discounted future cash flows method). A method called the Multiple of Discretionary Earnings (DE) method is often used in valuing small owner-operated businesses where potential buyers are often concerned with buying a job in addition to getting a return on invested capital.
